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The Shifting Power Equation: Implications for Smaller Countries

 

Speech by Angel Gurría, OECD Secretary-General    
at "Avenir Suisse" Foundation
Zürich, 6 March, 2007

Mr. Chairman, Ladies and Gentlemen,

It is a great honour to share some time with you at Avenir Suisse, a think tank noted for its independent approach to today's economic and business issues and its openness to new ideas.  We at the OECD very much appreciate the opportunity to exchange views with organisations like yours as we share an interest in common issues and challenges.

I have been asked to speak about the implications of globalisation for small countries. Few places are better suited to taking up such a challenge than Zurich, not just because of its importance as a banking and financial centre but because of its position at the heart of the Swiss economy. Many of us have been brought up to admire this country as a small state that has successfully defended its independence while providing its citizens with a very high level of prosperity and welfare. In today's environment, however, even the most prosperous countries are subject to the winds of change brought about by globalisation.  

Globalisation affects everyone, though in different ways and to different degrees. In both the world's biggest and most powerful economies, as well as in smaller countries, people are fearful of losing their jobs and livelihoods and are experiencing a growing sense of apprehension at the rise of powerful new players such as China, India and Brazil.  Smaller countries may also feel incapable of influencing the world economy.

We are facing something of a paradox here. A few years ago, globalisation was widely hailed as a positive force for good. Today, there is a tendency, at least in certain quarters, to see globalisation as "the mother of all evils".

A close look at globalisation reveals that it can indeed be a major, positive force for global progress and prosperity.  The free flow of investment and trade has brought about a healthy expansion of the world economy over the past few decades. However, billions of people still cannot reap the benefits because of structural poverty. In the meantime, the middle class feels increasingly alienated and we face unprecedented perceptions of economic insecurity.

Globalisation has an upside as well as a downside.   The combination of entrepreneurialism with the opportunities provided by new communications technologies and transport has led to an amazing explosion of commercial initiatives whose benefits extend to consumers around the world. But the exploitation of global opportunities for profit also has its darker side, which governments must not ignore. Offers of bribery for obtaining business abroad, anticompetitive practices of major companies can be part of it. 

To make globalisation an inclusive and balanced process, we need innovative and effective policies. This is where the OECD comes in. Our organisation was set up with a mandate to help the world economy work better. We do this by helping both our Member and non-Member countries to learn from each others' experiences.   Good policies can have positive effects in terms of sustainable and equitable economic growth. But there are such things as bad policies, which impact negatively on people's welfare and prosperity.   Even though small countries may feel squeezed by globalisation, they have a lot to learn and profit from other countries and also a lot to contribute. 

At the OECD, we pay great attention to the lessons that can be learned from the experiences of some of our smallest members: from Finland on education, for example, from Denmark on social welfare and labour policies, or from Ireland on fiscal policy and entrepreneurship.  Such features are not necessarily easy to replicate at a wider international level or in countries with larger and more diverse populations. But they contain lessons of which we all must be mindful.

In today's world, of course, it's the big countries that get the most attention. The rise of China and India, for example, the growing influence of Brazil, the clout of Russia and the regional influence of South Africa are topics of discussion in board rooms around the world. Not so long ago, China and India were inward looking countries with autarchic economies featuring major central planning. Today, they are estimated to rank as the 2nd and 4th largest economies of the world in terms of purchasing power parity.

The OECD estimates that China and India together have contributed 30% to global output growth since 2001. With populations of 1.3 and 1.1 billion respectively, their rapid growth has the potential to bring hundreds of millions out of poverty and create a middle class that rivals the EU and the US both in size and income.

That marks a radical change from the world of nearly 50 years ago, not only in the world economy.  Changes are also felt in institutions, and particularly at the OECD. In 1960, when the OECD was founded, its 20 founder members, including Switzerland, accounted for the bulk of the world's cross-border trade and investment.  This has been declining and we will need to take into account major actors that are increasingly contributing to shape the world economy.

In 2006, our annual ministerial meeting gave us a mandate to become the hub of an ongoing dialogue on the issues that are raised by globalisation. They also gave us a mandate to review possibilities for enlarging our Organisation's membership. Sooner or later, given their size and importance for the world economy, at least some of the BRICS are likely to be invited to start discussions with a view to becoming members of the OECD. 

But size alone will not be a determinant of success. Nor does it mean that smaller countries will lose importance. On the contrary, small countries have an essential role to play in the process of multilateral cooperation. We at the OECD value greatly Switzerland's positive contribution to all areas of our work. Suffice it to say that Switzerland, like other OECD countries, both contributes to and benefits from the collaborative work that it and its OECD partners undertake in almost all areas of the economy, from agreements on chemicals testing to standards of behaviour for multinational enterprises, the development of principles of corporate governance and the fight against corruption, amongst others. 

Small countries can also share some of the best practices.  Small countries can take advantage of globalisation, as Ireland, among other countries, has shown in a dramatic way. Ireland's openness to foreign investment, including low taxes on corporate profits, combined with a well-educated workforce and a constructive relationship between employers and labour unions have transformed what was once one of Western Europe's poorest countries into a "Celtic tiger" with annual growth rates of 5% or more. From having been a country of emigration, Ireland has become a target for immigration. In the last 20 years, employment levels in Ireland have risen by approximately 50%, absorbing more than 100,000 foreigners while at the same time giving new jobs to nearly 600,000 Irish citizens.

But the challenges of an interdependent world require countries to look into how they organise their societies. One of the main lessons that we have learned is that education is the key to progress in a knowledge economy. Perhaps not surprisingly, it is the smaller countries that often do best in this area.

There are many possible explanations. Their more homogeneous populations and more manageable infrastructures obviously help. An example is Finland, which in our PISA study of educational attainments among 15-year old students regularly achieves some of the highest average scores among OECD countries.  There are many explanations for Finland's success, but perhaps the most fundamental is that this country has placed an enormous political priority on delivering a good education for all its young people, and has built an education system focused on results where no child can fail. This is both an issue of social equity and a formidable competitive advantage in business.  

That's not to say that Switzerland does badly.  Switzerland has managed, for example, to retain a leading position in higher education. An indicator is the high number of foreign students registered in its universities, a total of 36 000 in 2004, equivalent to 18% of its tertiary education enrolments, compared to an average of 7.3% in the OECD area, many of them in advanced studies. Switzerland holds a leading position in terms of its production of learned articles in the field of science and engineering (1,154 per million inhabitants in 2003, compared to an OECD average of 505. Three Swiss universities featured among the top 100 in the Shanghai Ranking, a very creditable performance. Like the United States, Switzerland is an attractive place for foreign students to study because of the excellent facilities that are put at their disposal. The presence of top-quality international students also helps to maintain Switzerland's position as a leading centre for research and innovation.  These examples of success stories in small countries confirm that policies matter in order to take advantage of globalization.  But there are other similar areas where more needs to be done.  Let me continue with the Swiss case, relating it to its economic performance.

Switzerland has a high labour productivity, commensurate with the good performance of its industry in established sectors, including knowledge intensive ones like pharmaceuticals or financial services. Productivity growth has picked up slightly in recent years, after stagnating at the bottom of the OECD league table between the mid-1980s and the mid-1990s. However, Switzerland still lags behind other major countries such as the U.S., France, Britain and Germany in terms of productivity growth. One reason for this is the relative weakness of new and emerging industrial sectors, such as biotechnology, Information and communications technologies (ICT) and nanotechnology, in the Swiss economy, which in turn is a reflection of the tight regulatory conditions under which Swiss companies operate.   This is an area where Switzerland will need to move faster in order to create a more favourable environment for enterprises.  This is why policies matter.

Mr. Chairman, Ladies and gentlemen, I have sought to address some of the challenges of globalisation and how they affect a small country like Switzerland. Today, as never before, the future of mankind is being shaped by issues that go beyond any single nation's ability to address them independently, particularly smaller countries. We are fortunate that institutions like Avenir Suisse are prepared to join us in committing time and energy in pursuit of the fundamental task of helping those countries succeed.

Thank you very much.   I look forward to your questions and comments.

 

 

 

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